Fed cuts bond purchases by further $10bn

THE FEDERAL Reserve last night announced it would trim the US quantitative easing (QE) easing programme by another $10bn (£6.03bn) next month, the second month of winding down the central bank’s policy.

In his last meeting as Fed chair, Ben Bernanke had unanimous agreement for the decision, which cuts asset purchases from $75bn currently to $65bn next month. If tapering proceeds at the same speed with each monthly decision, the US QE programme will end in the second half of this year.

It is the first time that a decision has been agreed unanimously on the Federal Open Market Committee (FOMC) in two and a half years.

In its statement after the decision, the FOMC said that inflation is still subdued, projecting that it will stay muted in the two years ahead, suggesting that the normalisation of US monetary policy is still distant.

“The first tightening of monetary policy is still some way off. The Fed today reaffirmed that it does not expect to hike rates until well past the time that the unemployment rate declines to 6.5 per cent,” said Berenberg’s Robert Wood.

The Fed also appeared to have grown more confident about the economy, saying that the restraint of fiscal policy on the economy “is diminishing”, as opposed to December’s suggestion that it “may be diminishing”.

From next month, Fed vice chair Janet Yellen will take the helm, and is widely expected to carry on with the same agenda.

The change in US monetary policy has been contributing to volatility in many emerging markets. In the past week, South Africa, India and Turkey have hiked interest rates to stem the devaluation of their currencies, while Argentina has been forced to begin peeling back the peso’s strict capital controls.

The Fed’s statement following the decision made no reference to the tumultuous behaviour of some foreign exchange markets. The upheaval is expected to continue as money flows out of the developing economies.